10 Feb 2018 13:36 IST

SEBI can now go after even ‘small schemers’

Apex court ruling against fraudulent ‘synchronised trades’ empowers regulator

A Supreme Court judgment has opened the door for SEBI to punish even the smallest manipulation schemes and bring perpetrators to book irrespective of the scale of their fraud.

The apex court, in two separate orders on Thursday, said that even small schemes of fraud in the derivative segment could impact the ‘integrity’ of stock markets.

The orders were given in a case against two derivative traders who had entered into sham transactions to manipulate the market.

The orders, by Supreme Court judges Kurian Joseph and R Banumathi, effectively upheld a SEBI ruling penalising the traders.

Not disruptive, claim traders

In recent years, manipulators have tried to argue that since their ‘synchronised’ trading did not disrupt the wider market prices, their trades could not be called fraudulent.

The apex court’s order is a shot in the arm for market regulator SEBI, which had passed an order against the two traders.

Counsel for the two traders, P Chidambaram, argued that a security like ‘Nifty’ is a vast pool and a dynamic index, which makes it difficult for the manipulator to affect (its) prices.

The Securities and Appellate Tribunal (SAT) too had observed that “only if there is a market impact on account of sham transactions could there be a violation of SEBI’s fair trade rules”.

Both these arguments were set aside by the Supreme Court, enabling SEBI to link the matter with market integrity and impose severe penalty even on the smallest manipulations in the derivative segment.

SEBI had imposed a penalty of Rs. 1.8 crore on Rakhi Trading for indulging in synchronised trading in March 2009 to generate artificial volumes of futures and options (F&O) trades on the National Stock Exchange through the ‘reversal of trade’ route.

However, SEBI’s order was struck down by SAT in 2011.

“The SAT’s setting aside of the SEBI order would have given a freeway to manipulators,” said a Mumbai-based lawyer dealing in SEBI matters.

“The Supreme Court ruling is a landmark judgment as its nullifies the arguments of scamsters who got off the hook by saying that their trading schemes were not fraudulent as they did not impact the wider market,” the lawyer noted.

The modus operandi

A ‘synchronised’ trade is a pre-negotiated trade where buyers and sellers enter the quantity and price of shares on the screen they wish to transact at nearly the same time.

In 2007, suspecting manipulation in the trading of F&O, a SEBI probe found that Rakhi Trading and a few other firms were buying and selling derivatives in equal number within a day.

“Except the parties who have pre-fixed the price, nobody has the position to participate in the trade. It has an adverse impact on fairness, integrity and transparency of stock markets,” said the Supreme Court.